Easy Come, Easy Go

By: Rob Kirby | Wed, Oct 5, 2005
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This past week saw already unsettling rhetoric between the U.S. and Venezuelan leader Hugo Chavez 'kick it up a couple notches,' so to speak, when it was revealed on Friday, Sept. 30 - that Venezuela had moved its central bank foreign reserves out of U.S. banks, liquidating its holdings in U.S. Treasury securities - moving the proceeds to Europe.

"We've had to move the international reserves from U.S. banks because of the threats from the U.S.," Chavez said during televised remarks from a South American summit in Brazil.

Anyone ever wonder what the Venezuelans might be purchasing with those proceeds?

While it's perhaps somewhat difficult to view this development in a positive light - it did shed some light on what might have been motivating the Fed's aggressive actions 'behind the curtain' where their Open Market Operations are concerned:


Charts compliments of: www.omo.co.nz

The chart above depicts changes to the aggregate monetary balances in the financial system resulting from Fed Open Market Operations from Sept. 19/05 thru to Friday, Sept 30/05. The extent of the bloating of liquidity [cash] in the financial system is perhaps better appreciated when viewed in the context of this graph below:

In viewing the chart above, one can clearly see the recent obscene parabolic "add" of liquidity thru open market operations by the Fed thru their daily activity in the context of the year to date. To the uninitiated, what this graphically depicts - categorically - is the Fed responding to "systemic stress" on the financial system. My guess that the action depicted above was the Fed's response to a Venezuelan 'liquidation' of their U.S. obligations is pure conjecture on my part. It is my sincere hope that my conjecture on this matter proves to be accurate, because if I'm wrong - systemic problems in the financial system still exist - and we, the great unwashed, simply do not know what the cause really is.

While I have grown to be suspect of most Fed data - the above scenario seems to be somewhat plausible given this August 12, 2005 amendment to the Venezuelan Central Bank Act - where it was reported:

The National Assembly has passed the amendment to the Central Bank of Venezuela Act, making changes to the system to be followed for delivery of oil income in foreign currency and authorizing the transfer of part of the international reserves when they climb above the appropriate level of US$20 billion.

The money will be deposited in the National Development Fund (Fondem), to be created by presidential decree, in order to provide the resources to be used by the Executive Branch in financing investment projects, education and health plans, and payment of the foreign debt.

It has yet to be seen how these new rules will affect the country's monetary policy and financial system, especially once the rules governing the Fondem have been defined.

On my planet, this seems to be highly indicative that Venezuela's U.S. dollar holdings were already being somewhat curtailed given that U.S. dollar balances would naturally [and necessarily] have been accruing at an ever increasing pace - arising from the ever increasing price of crude oil exports that--currently--all settle in U.S. dollars.

The only question that I'm left with - another conundrum inducing head scratcher - why didn't Venezuela's [former] 20 odd billion of U.S. obligations ever get them included on this illustrious TIC data list:?

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
(in billions of dollars)
HOLDINGS 1/ AT END OF PERIOD
Country 2005
July
2005
June
2005
May
2005
Apr
2005
Mar
2005
Feb
2005
Jan
  Japan 683.3 681.3 686.2 685.7 680.5 680.3 679.3
  Mainland China 242.1 243.7 243.5 240.5 223.5 224.9 223.5
  United Kingdom 2/ 160.0 144.9 132.5 125.2 122.2 111.6 101.1
  Caribbean Banking Centers 3/ 103.4 107.2 125.9 124.6 137.2 104.7 94.2
  Taiwan 72.3 71.2 70.9 70.6 71.1 68.5 68.3
  Germany 61.9 61.1 61.2 60.8 56.0 53.0 53.8
  Korea 59.2 59.6 58.7 55.9 57.1 53.1 53.6
  OPEC 52.8 57.3 62.6 60.6 62.2 67.6 67.0
  Hong Kong 48.5 48.2 47.6 47.2 45.2 45.2 45.3
  Canada 46.7 43.6 41.1 42.1 38.4 38.0 35.4
  Norway 43.8 45.3 37.7 29.8 16.9 33.8 35.1
  Luxembourg 41.1 38.5 44.6 45.3 42.2 42.9 41.7
  Switzerland 37.4 39.4 42.0 43.3 44.1 44.3 40.8
  Mexico 35.0 31.9 31.2 31.6 32.5 33.0 33.5
  Singapore 28.6 28.9 30.3 30.0 30.7 29.2 29.9
  Brazil 23.2 20.8 16.8 16.2 14.7 13.6 13.8
  France 22.2 19.0 28.0 22.3 25.1 27.1 21.2
  Sweden 19.0 19.4 17.9 16.8 16.9 16.3 15.8
  India 17.6 16.1 16.9 18.0 18.3 18.1 15.9
  Belgium 16.1 16.0 15.8 15.7 15.3 16.7 16.8
  Italy 15.8 14.6 14.4 14.7 14.5 13.8 13.1
  Turkey 15.2 13.8 10.1 10.7 11.4 10.4 12.9
  Netherlands 15.1 14.7 15.2 17.0 18.1 16.5 16.8
  Ireland 14.7 14.0 17.7 13.3 17.2 17.8 15.6
  Thailand 12.1 12.8 13.3 11.1 12.1 13.0 13.3
  Poland 11.2 11.4 11.8 11.9 11.4 10.6 10.2
  Israel 9.2 10.0 10.3 11.6 14.6 14.3 14.9
All Other 127.3 122.7 124.6 128.6 128.1 128.0 125.8
Grand Total 2034.8 2007.4 2028.8 2001.1 1977.5 1946.3 1908.6
               
Of which: FOI 1235.5 1233.8 1241.7 1236.1 1227.9 1242.5 1238.3
Treas Bills 203.2 205.2 229.0 230.1 235.8 235.5 242.6
Notes&Bonds 1032.3 1028.7 1012.8 1006.0 992.0 1007.0 995.7
 
Department of the Treasury/Federal Reserve Board
9/16/2005 1/ Estimated foreign holdings of U.S. Treasury marketable and non-marketable bills, bonds, and notes reported under the Treasury International Capital (TIC) reporting system are based on annual Surveys of Foreign Holdings of U.S. Securities and on monthly data.
2/ United Kingdom includes Channel Islands and Isle of Man.
3/Caribbean Banking Centers include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama.
Data compliments: U.S. Treasury

It sure looks to me that if Venezuela truly was invested in U.S. obligations to the tune of 20 billion - OPEC totals in the TIC data above should have perhaps been greater than the 53ish billion in the table above. After all, OPEC is a ten-country club now - isn't it? [Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela]. Oh well, I guess that's what happens in the world of high finance - it's easy come, easy go.


 

Rob Kirby

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